CREDIT Chapter
CREDIT Advantages/Disadvantages purchasing power standard of living provides emergency funds budgeting receipts safety Can cost more Reduces comparison shopping Ties up future income Can lead to overspending
Preventing Credit Card Fraud Carry only the cards you need Keep a list of # in safe place Notify creditors if lost or stolen Keep copy of receipts to compare to bill Notify creditor is discrepancy appears Sign new cards Destroy (cut) expired cards Don’t give numbers over phone Keep card in view at all times
Sources of Credit Merchants - retail stores Banks and Credit Unions Loans, Credit Vs. Debit Finance Companies Small Loans, High Rates Pawnshops Private Lenders - family, friends Unlicensed Lenders Loan Sharks (lowest rate 120% - ILLEGAL!
Kinds of Credit Open-Ended Credit (Credit Cards) Open 30-day accounts Must pay full balance each month (diners club/amex) Revolving credit accounts Pay in full or min. payment Closed-End Credit (Specified Amount) Installment loans Service Credit (Service Given - Pay Later) Layaway Plans (Down Payment -weekly/mthly)
3 C’s of Credit Character - will you repay how much you owe, if you pay on time financial responsibility. (Credit history) Capacity - can you repay do you have $ left over after fixed expenses? Income/expenses (time at current job/house) Capital - value of what you own savings, investments, property. Assets (collateral)
Credit Records/Reports/Bureaus A co. That gathers and sells credit information is called a consumer reporting agency (CRA) or credit bureaus. Computerized. Name, address, ss#, income, public records, current accounts, loans, bounced checks, payment patterns, sued, etc. Trans union, Equifax, and Experian www.(Name).Com. Who sees your report? Creditors considering granting you credit, employers for employment, insurers, court orders. Information stays on your report for 7 years!
Credit Ratings Excellent Good Fair Poor Always pays bills on or before due date. Better if married, owns home, +5 yr. job. Good Pays bills on due date or within 10 day grace period Fair Pays bills in grace period, occasionally longer Sometimes assessed late charges Poor Misses payments, reminders needed. Threats to collection agency Credit Ratings
Your Credit Rights Fair Credit Reporting Act. Promotes the accuracy and privacy of information in consumer credit reports. If denied credit you can get a free report. Right to present your side of the story in a brief 100 word statement. Equal Credit Opportunity Act. Lenders can’t discriminate on the basis of sex, marital status, race, religion, age (18), etc. Truth and Lending Law & Consumer Credit Protection Act Know how being charged (APR, Annual Fee, etc.)
Avoiding Unnecessary Credit Costs Accept only the amount of credit that you need. Keep cards to a minimum. Pay cash for small purchases. Shop for loans. Use credit to beat inflation. Time purchases carefully - know your billing dates. Take advantage of rebate programs.
Creditors Calculate Finance Charges by: Adjusted Balance Method pay finance charge only on unpaid amount $300 - you pay $250 (finance charge on) Previous Balance Method Most expensive way. Pay finance charge on the whole month. (allows no deductions on payments made) Average Daily Balance Adding all daily balances and dividing by the number of days in the cycle (25-30) $300 - you pay 250 got there on the 15th - $50 left 300*15 50*15 divided by # of days
How to Select a Credit Card Distribute Handout Study for short quiz tomorrow
LOANS Secured loan - assets offered as collateral to guarantee payment Unsecured loan - no specific assets are pledged by the credit user as security. Co-signers must pay!
BANKRUPTCY Involuntary - Debtor is declared bankrupt by a court Take assets and distribute (proportional share) Voluntary - a person asks to be declared insolvent (bankrupt) ON FILE FOR 10-14 YEARS!!!!!!
BANKRUPTCY Advantages Disadvantages Debts are erased. Exemptions are allowed. Certain income is unaffected. The cost is small. Disadvantages Credit is damaged. Property is lost. Some obligations. remain (Taxes, Child support, alimony). Cosigners must pay.
TYPES Chapter 11 - for businesses can retain control or court appoints a trustee Chapter 7 (straight) - Liquidation, assets sold to get cash to pay off debts. Must give up all property except for exempted items. Chapter 13 - Court enforced plan to repay (3 yrs.) - keep all property Reaffirmation - an agreement to repay after bankruptcy proceedings are completed
TERMS Reaffirmation - Agreement to repay some debts after bankruptcy proceeding are completed Exempted items - property the law allows a debtor to keep or protect in declaring bankruptcy Discharge - the balance of debts no longer owed after bankruptcy